Policy Statement & Submission

This is a submission from The Hong Kong General Chamber of Commerce to the Financial Secretary, Sir Donald Tsang Yam-kuen, on the recent deterioration in the employment situation in the Hong Kong Special Administrative Region (SAR) of the People's Republic of China. The paper examines the development of the present employment situation in the SAR and the rise in the level of unemployment in the past six months. It also proposes short and medium-to-longer term measures to alleviate the present unemployment situation.

Summary statements on the present unemployment situation and the Chamber's major recommendations are contained in Section I of the paper. Section II examines the background to the present unemployment situation in somewhat more depth. The Chamber thanks the Government for the opportunity to put forward its views on this important issue for the Hong Kong community. It welcomes the establishment of the Financial Secretary's Task Force on the issue with its aims of reviewing the present employment situation, assessing the immediate outlook, examining present employment and training measures and considering future action.

SECTION I: MAJOR RECOMMENDATIONS

1.Employment and Economic Growth
Promoting economic growth and investment is the most effective employment policy that any economy can pursue. As a relatively small, open economy, the Hong Kong SAR is more vulnerable than most to regional and global economic setbacks, the current East Asian economic crisis being merely the latest example of this effect. In such circumstances, it is difficult for the Government to do much domestically to move the economy along more rapidly - at least in the short term. The ability to use monetary policy to stimulate the economy is limited by the linked exchange rate. Fiscal policy stimulus, while having medium-to-long term potential to underpin growth, is also limited.

Nevertheless, the Government's medium-to-longer term economic policies should continue to be primarily focussed on returning the SAR economy to the medium range Gross Domestic Product (GDP) growth target of a real five (5) per cent a year and encouraging greater local and foreign investment in the local community. Government policies should also be aimed at addressing any structural imbalances emerging in the economy. Encouraging banks to lower interest rates as soon as market conditions allow would be positive for growth and employment.

2. Employment - Cyclical v. Structural Factors
The immediate cause of the present rise in unemployment appears to be substantially cyclical in nature - a result of the impact of the East Asian financial crisis on the SAR's rate of economic growth. There is, however, some evidence to suggest structural imbalances in the economy may also being playing a role. These include possible labour market distortions brought on by the massive reliance on growth in existing key service industries and the property sector in particular; the faster rates of population and workforce growth which appear set to continue; and some companies in Hong Kong's older service industries perhaps permanently "down-sizing" their workforces due to higher wage costs and new labour regulations. MPF introduction will also add to costs.

As noted above, Government policies should therefore be aimed initially at alleviating the short-term impact of the economic slowdown on employment prospects by encouraging growth. But the prospect of creating new jobs in new industries may also need to be addressed to help overcome any structural factors affecting employment. Hong Kong has not, for quite some time, explored new avenues for growth and development. Therefore it is now vital for the government to strengthen the planning and research work on its future direction and developments.

The tax concessions (which will have greater impact in 1999), freeze on fees and charges and infrastructure spending programmes announced in the 1998-99 Budget provide a good start in this direction, but will take time to have an impact in the latter half of this year and into 1999 and beyond. Where possible, these projects should be speeded up to provide an earlier impetus to growth and employment.

Relevant training of potential employees should also take place prior to the commencement of these projects, with particular emphasis given preparation of the local labour force.
The Government should also examine the prospects for new start-up industries in Hong Kong to provide new job opportunities.

3. Employment and the Costs of Employment
The worsening unemployment situation this year has been especially exacerbated by two factors - the more rapid growth in population and labour supply over recent years (see Section II) and the higher costs of employment. Little can be done about the former, but the latter should continue to be addressed as a matter of urgency. The high costs of employment become all the more important when economic growth slows and profit margins come under pressure. Wage restraint must continue. Although high employment cost is one of the primary reasons for rising unemployment, the "asset bubble" phenomenon over the past years also brought along high inflation, pushing up employment costs (reducing labour competitiveness). On the other hand, because of political and other reasons, the SAR cannot make a one-off move to substantially reduce the overall labour costs (and prices), nor can it devalue the currency to remain competitive. Therefore the main objective within the next few years should be to maintain low inflation and lower employment costs. The government should encourage further wage restraint before employees are made redundant.

Both Government and business should aim for zero growth in nominal wages in the next round of wage adjustments. This may seem harsh but is necessary to preserve employment and Hong Kong's competitiveness. There is an inevitable trade-off between wages and jobs. During an economic slow down higher wages for some may mean fewer jobs for others.

Singapore's tripartite (government, business and unions) National Wages Council recently urged wage restraint because of the regional downturn (see attached).
The Government should also seek to avoid any further additional charges on the private sector that add to business and employment costs. Where possible it should also seek to reduce the burden on business by reducing taxes and charges, doing away with unnecessary regulation and speeding-up licensing applications and other approvals required by business from government.

4. Employment and Confidence
Economic confidence once shattered is difficult to restore. As a small, open economy, the Hong Kong economy often sees rapid swings in the level of confidence the community has in the immediate economic outlook. Any decline in confidence has a rapid impact on domestic consumption and investment and ultimately employment levels. In such circumstances, it is important that the present rise in unemployment should not be over-dramatised.

Both Government and business should therefore avoid overly negative comments on the employment outlook that could create a psychological effect that may be difficult to reverse. They should instead concentrate on an on-going realistic and measured assessment of prospects for communication to the broader community.
The potential for a downward spiral in confidence stemming from continued negative statements should not be under-estimated.

5. Employment and Employee Attitudes
Having said that, however, with the onset of the economic slow down and the need to improve competitiveness, there is a real need to ensure the community understands that times are more difficult and that workers will have to be more realistic in their expectations and in assessing job opportunities. They will also need to be more flexible in their attitudes to work.

In particular, employees must understand that finding a job in the new economic conditions could involve accepting lower pay in some cases, showing a preparedness to travel further to secure employment and a willingness to move into an entirely new field of employment.

In partnership with their employers they should help reduce costs by economizing in their operations, and increasing productivity and efficiency, rather than facing redundancy or the closure of their employers' business.

Such an approach would be particularly beneficial to small and medium size businesses.